Companies angry over VAT chaos

Start-up businesses face collapse as Government fails to tackle registration delays

Delays in processing VAT registrations, which are crippling sections of the British business community, are likely to continue for months, admits the minister in charge of cleaning up the mess.

The Government recently set a target for Revenue and Customs (HMRC) to process 70 per cent of VAT registrations within 14 days by January, but Jayne Kennedy, the financial secretary to the Treasury, conceded that the deadline will not be hit. A meagre 20 per cent of applications are thought to have met the criteria in September with complaints soaring to record levels.

Complaints more than doubled to 851 in the year to April 2007, compared with 401 in the previous 12 months. In the past six-months, 829 complaints were received with a flood expected in the coming months as processing woes continue.

Ms Kennedy said things were unlikely to improve quickly: "The HMRC is working towards the target. However, it will be a challenge for them given the constraints they face."

This failure will be a blow to many businesses facing closure as a result of the backlog. Peter Carnall, the managing director of Stoke-based Eurostar Global Electronics, said his new venture was likely to go under following a nine-month delay in the processing of his VAT application.

"The whole debacle has left me glowing red with anger," Mr Carnall said. "We've incurred huge costs as a result of the delays, while we have also lost out on a number of deals with companies in Europe who won't do business with us because we don't have a VAT number. We've estimated the loss on turnover is around £480,000 while lost profits are approximately £34,000.

"We are owed more than £110,000 in VAT from the Revenue which has amassed in the past six months trade and anticipate this may take up to two years to get back. This will mean more lost profits while our cash flow is weakened."

Mr Carnall had been planning to recruit another six staff to the growing operation but the VAT delays have ended any thoughts of expansion in the short term. "Stoke-on-Trent is an area that is crying out for more employment opportunities but the delays in VAT registration are stopping us and others like us from growing. It's crazy," Mr Carnall said. "We applied for our registration on 23 March. So far, we have not received our number."

Mr Carnall's local Labour MP, Robert Flello, said: "I'm not happy at all about the way the HMRC is tackling the VAT issue with respect to mobile phone companies. Frankly, the criminals have moved on elsewhere and legitimate business is being harmed. The Revenue needs to be much quicker in turning its attentions to the right areas. I intend taking up the issue with the Paymaster General in the coming months."

Peter Stephens, the managing director of Deutsche Leasing, said his VAT travails eventually included a 200-mile journey down the M4 to sort out the problem.

"We are a subsidiary of Deutsche Leasing which is in turn owned by the German savings banks, Sparkassen, so we have an impeccable background, good trading record and no VAT disputes. But we're told we would have to wait three months for the registration, which was unacceptable as a big deal was involved," Stephens said.

"I was forced to drive to our designated VAT office in Carmarthen from our base in Reigate. Someone should look at the conditions under which the people in the VAT offices work as the staff must be so de-motivated by working in a half empty government office with no public access, a post box covered in cobwebs for hand deliveries, broken bottles and discarded beer cans littered around the site in the middle of a very run down industrial estate.

"Having managed to establish contact, we had great service and received our approval in a timely fashion, but if I were a typical small business I would have lost two or three day's productive work. Things have to improve because it's frankly shambolic at the moment."

Frank Haskew, the head of the tax faculty at the Institute of Chartered Accountants, said business is likely to suffer the effects of an inadequate VAT processing system for some time.

"There's a bit of evidence suggesting it is speeding up – draft figures to the end of September show that 20 per cent of registrations are completed within the 14 day target," he said. "But with the best will in the world, there is no chance that the 70 per cent target will be reached by January. People will just have to grin and bear it."